AUDUSD Fundamentals Mixed, but Technicals Shifting In Favor of Bears

Though we’ve seen minimal volatility in the AUDUSD over the last five weeks, with rates consolidating within just a 175-pip range over that period, the price action has been nonetheless interesting. Three weeks ago, the Aussie appeared to be breaking out to a new 8-month high above resistance in the upper-.9400s, which represents the confluence of the April highs and the 78.6% Fibonacci retracement of the Q4 2013 drop. Just as bulls were starting to build momentum, RBA Governor Stevens pulled the rug out from under them with his comments that the Australian dollar was overvalued by “more than just a few cents” and that that many investors were underestimating the potential for a large drop in the value of the Aussie.

Since that fateful breakout attempt, the AUDUSD has merely marked time oscillating around the .9400 handle as the market weighs Stevens’ comments against the Aussie’s attractive yield. Today’s Chinese data dump did little to make up traders’ minds: GDP and Industrial Production came out slightly better than expected at 7.5% q/y and 9.2% y/y (vs. 7.4% and 9.0% eyed respectively), but Retail Sales in the world’s second largest economy rose at “only” 12.4%, missing the 12.5% level that traders had been expecting. With the fundamentals in flux, the technical picture is more critical than usual.

Technical View: AUDUSD

The most prominent technical feature on the AUDUSD daily chart is the aforementioned failed breakout above .9500. As we often note, false (failed) breakouts often lead to strong reversals back in the other direction, and for that reason, we’ve been growing increasingly bearish on the AUDUSD over the past two weeks. Earlier today, the pair dipped below support at its 50-day MA, but buyers quickly stepped in around .9325 to drive the pair back up to the mid-.9300s as of writing.

Taken as a whole, the price action over the last five weeks has created a clear Head-and-Shoulders formation. For the uninitiated, this classic technical pattern shows a shift from an uptrend (higher highs and higher lows) to a downtrend (lower highs and lower lows) and would be confirmed by a break below the neckline at .9325. While that area is holding strong thus far today, there are some signs that it could be in jeopardy later this week. For one, the RSI formed a clear bearish divergence between the left shoulder and head of the pattern, showing declining buying pressure and increasing the likelihood of medium-term top. Meanwhile, the MACD is trending lower beneath its signal line and is about to cross below the “0” level, signaling a possible shift to outright bearish momentum.

Bringing the technical picture together, the key area to watch will be support at.9325: if sellers can overcome this floor, then a drop down to at least converging previous / 200-day support at .9200 becomes likely. Beyond that, the measured move target of the Head-and-Shoulders pattern comes in at .9150. Only a sustained break above the .9500 would shift the longer-term bias to the topside from here.

Key Economic Data / News That May Impact AUDUSD This Week (all times GMT)

• Today: Speech by Fed Fisher (16:00), Fed Beige Book (18:00)

• Thursday: AU CB Leading Index (0:00), NAB Business Confidence (1:30) Speech by RBA (1:55), US Building Permits, Housing Starts and Unemployment Claims (12:30), Philly Fed Manufacturing Index (14:00)

• Friday: US UofM Consumer Sentiment (13:55)